When Will Retail Banking Return to ‘Normal’? Should It?

By Rolland D. Johannsen

Over the past few months most banks have adapted well to an environment that nobody expected and for which few, if any, were prepared. Most affected by the changes: the retail side of the business.

Many banks have restricted or eliminated branch lobby access and beefed up drive-through capabilities, expanded remote and digital access, adjusted policies to increase mobile deposit and debit card limits, installed more flexible approaches to penalty fees and payment requirements, facilitated small business access to government programs, developed remote working practices and installed many other solutions—both large and small—to serve their customers, protect their employees and maintain their market positions.

As communities and the economy lurch toward some semblance of “normal,” the question confronting most bank executives is whether to return to the status quo ante pandemic or adopt lessons learned to make fundamental changes to the organization’s strategies, operating principles and business models.

Some of these lessons are obvious and reflect trends already underway. The best example may be increased use of digital delivery channels. In fact, a number of banks have reported increases in online activity of 50 percent and beyond.

It is likely that this increased activity will continue, especially as banks maintain more flexible policies and invest in additional sales, service and transactional digital functionality. Some, however, are less obvious and involve fundamental issues and questions regarding, among others:

  • The nature of work
  • Leadership capabilities and characteristics
  • Management systems that depend on frequent in-person meetings
  • Rigorous control environments
  • Policies that discourage individual empowerment and authority
  • The true nature of corporate culture
  • The need for large and expensive headquarters

The list of possible issues that can and should be addressed is both broad and deep—impacting the enterprise as a whole, as well as issues that are specific to certain business units and operating areas. However, the most significant effects have been on retail banking in general, and the branch system in particular.

We believe that branches will remain a critical component of most banks’ business models and value propositions. After all, they are the “face” of the company and help to create, maintain and enhance the company’s brand. However, we also believe that significant and potentially transformational change is required to maintain the viability and effectiveness of branches and create market distinctiveness and differentiation vis-à-vis non-bank and non-traditional providers. Consequently, we believe the time is right for retail banking executives to take an even harder look at their branch networks and make decisions and develop programs to address the following:

Branch network optimization. The reduction in branch lobby traffic over the past decade and the accelerating use of digital channels have created questions regarding the need for large branch networks. The closure of most bank lobbies over the past few months has only amplified these questions. While we expect many banks to target between 15 and 30 percent of branches for closure by 2022, we do not believe that wholesale elimination is either feasible or advisable.

Market differentiation. It is likely that most banks will revert to pre-pandemic branch operating models once they are able to reopen their facilities and resume “normal” operations. This presents an opportunity for community and regional banks to transform fundamentally the role and functionality of the branch to make them more distinctive, productive and cost-effective. This option is less available to large banks with extensive branch networks, firmly entrenched and inflexible business models, and significant market presence across diverse geographies.

In-branch technology. While the expansion of remote delivery channels is clear, the outlook for other types of customer-facing, branch-based technology is less so. Over the past few years a number of banks have tested and installed selectively in-branch technologies such as interactive teller machines and interactive video.

The performance and customer acceptance of these systems have been mixed and expansion has been slow. Nevertheless, over the next few years we expect more institutions to increase investment in, and installation of, in-branch technology capabilities to automate and streamline routine and high-volume types of transactions. We also expect expanded development and deployment of other types of technology solutions to increase the productivity of branch-based personnel. This includes a significant increase in the use of technologies such as robotic process automation to help automate repetitive and duplicative functions associated with customer service and account opening processes.

The role of the branch. For most banks, the role and configuration of the branch has not changed substantially for decades. In order to drive fundamental change, it is necessary to redefine our expectations regarding what the branch is and does. One option is to view the branch as a “utility,” housing all relevant customer-focused functions—retail, mortgage, small business, commercial, wealth management—rather than a sales and service environment focused primarily (exclusively) on the retail customer. This is not a new concept, but few banks have made the switch fully or effectively. For example, they may house specialists in selected branches but don’t manage the “stores” or the network as integrated facilities.

Staffing models and configuration. This requires defining specifically what customer-facing functions can and should be offered in the branches for each represented business line and assigning staffing and skill levels accordingly. For example, if all retail functions and services can be provided by universal bankers with the appropriate training and authorities, those should be the only retail employees assigned to the branch. Proactive retail sales activities can then be handled differently, either centrally or outside of the branch. Similar functional requirements and responsibilities can be established for other business specialists housed in the branch. The branch can be the center of sales activity for the market even if most sales are conducted outside the branch, including via digital channels.

Management roles and responsibilities. The environment also presents the opportunity to transition the branch manager role to a true market manager, coordinating and managing all business lines within a geographic market. Goals, job descriptions, skill sets, performance management metrics. and compensation systems should reflect this expanded role.

Sales and marketing integration. As branch traffic declines, and branch staffing and configuration models change, it will become increasingly important to develop new approaches, processes, and tools to support customer acquisition, cross-selling and retention activities. This will require viewing sales and marketing as an integrated process rather than separate functions that may or may not have similar objectives or success metrics.

Additionally, much of the systemic coordination between sales and marketing programs and processes must be accomplished in an online environment, utilizing highly targeted and automated digital marketing techniques and more robust fulfillment capabilities to expand and deepen the customer franchise. Expansion and adoption of digital signature capabilities will be necessary to provide a truly online experience for both deposit and loan products.

Space utilization. While branches play an important role in brand awareness and promote trust in the financial institution, they are costly to operate and maintain. However, to the extent the branch real estate square footage is underutilized, we believe it makes sense to consider using it for other sales, service and operational functions. There is no reason to lease office space for sales personnel, call center staff, etc., if available branch space can be repurposed.

The nature and scope of transformation. There are a number of alternative approaches to transform the branch network, fundamentally change functionality, deploy service-focused technology, modify staffing models, install new management protocols and the like. We believe that those banks who are willing to think creatively will view the lessons learned during the pandemic as an opportunity to make substantial change to the branch operating model. The key is to identify the alternative approaches, evaluate each component, and create a transformational agenda that is consistent with the bank’s overall strategy, market position, and financial expectations.

Deciding which learnings are sustainable and will drive ongoing changes to the business model, operating environment and management approaches will vary by institution. Some will adopt a major transformational agenda while others will make few, if any, changes. However, in order to not only maintain the viability of the retail business, but to enhance significantly its performance, we believe the time is right to leverage the experiences of the past few months to make significant and sustainable changes to the branch environment.

Rolland D. Johannsen is a senior consulting associate at Capital Performance Group, a strategic consulting firm that provides advisory, planning, analytic and project management services to the financial services industry.